China, Sri Lanka at loggerheads over interest rates

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COLOMBO – While the world focused on Donald Trump’s shocking victory at the US Presidential Election, another global superpower was at loggerheads with tiny Sri Lanka after a senior minister in the Sri Lankan government accused China of lending money to the island nation at much higher interest rates than the accepted lending rates.

Sparks have been flying since the beginning of November between Sri Lanka’s Finance Minister Ravi Karunanayake and Chinese Ambassador Yi Xianliang, after the Ambassador had claimed that many in the Sri Lankan government including Karunanayake had made statements to the effect that the interest rates on the Chinese loans were expensive. “Some ministers say our interest rates are expensive, this is unfair,” Xianliang said. He had also questioned as to why the Sri Lankan government was then seeking more loans if the interest rates were already so ‘high.’

The Ambassador said China considers Sri Lanka a ‘friend country’ and therefore offers loans at a much better rate than other nations do to Sri Lanka. “We give loans to developing countries like Sri Lanka at 2% interest and not 5% like most other countries,” he said.

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“Sri Lankan people and the government must have gratitude,” Xianliang said. He also claimed that the Sri Lankan government took loans from Europe last year, with a high interest rate of 5.8% against China’s 2%.

However, in response to the Ambassador’s statement, Karunanayake said that in the past, China had granted loans to Sri Lanka at an interest rate in excess of 5%. The Finance Minister emphasized that development loans are usually given out at 2%, while commercial loans are granted at an interest rate between 6% to 8%. “But, Chinese loans had been given to Sri Lanka at an interest rate in excess of 5%,” he said, while adding that even international lending agencies grant loans at an interest rate of less than 2%.

When Xianliang said that his country gives loans at a 2% interest rate to developing countries like Sri Lanka, Karunanayake was quick to retort that, if that was the case, then the present government was happy to pay the loans at a 2% interest rate.

“If they (China) gave us loans at an interest rate of 2%, then we are ready to pay the same 2%. But, I reject the Ambassador’s statement, and we are taking every effort to reduce the interest rate from China,” Karunanayake added, while also denying the Ambassador’s claim that his government had taken any loans from any European country.

As the verbal battle ensued between both Karunanayake and Xianliang, Sri Lanka’s foreign ministry had to intervene to settle matters by telephoning the Ambassador. Even though the foreign ministry initially decided to summon Xianliang to the ministry, on advice from the higher authorities, it was decided against the move, as it could antagonize the Chinese government, and put a strain to the recently renewed relations between the coalition government and China.

Following the statement by the Ambassador, Sri Lanka’s foreign secretary Esala Weerakoon telephoned Xianliang to officially express the Sri Lankan government’s concern over the matter. During the conversation, Weerakoon told Xianliang that he should not communicate his concerns about any issue through the media, and instead they should be directly discussed with the government. The Sri
Lankan government also communicated to the Chinese government that they are prepared to discuss any concerns that may have arisen following the row.

However, the Chinese government was quick to defend it’s envoy’s statement claiming that the Ambassador had only ‘clarified’ misunderstanding and misleading statements in relations to Sri Lanka and China’s cooperation. “The Chinese Ambassador to Sri Lanka exchanged views with friends from the media on China-Sri Lanka relations and the status quo of bilateral cooperation and clarified some misunderstandings and misleading remarks regarding China-Sri Lanka cooperation at a seminar,” Chinese Foreign Ministry spokesman Lu Kang was quoted as saying to PTI.

Since President Maithripala Sirisena came to power in January last year, Sri Lanka’s relationship with China has been somewhat strained, after Sirisena and Prime Minister Ranil Wickremesinghe suspended the US$1.4 billion offshore development project known as the ‘Colombo Port City’ citing corruption and procedural irregularities, just months after taking office.

The Chinese funded project was the brainchild of ex-President Mahinda Rajapaksa who is well known for his pro-china stance. During, Rajapaksa’s term, the relationship between the two countries was at an all-time high, specially after China offered military support to Sri Lanka to fight the Liberation Tigers of Tamil Eelam (LTTE), bringing a quarter century long war to an end, with the leader of the group, V. Prabhakaran being killed by the Sri Lanka military in 2009, and subsequently China investing in almost every infrastructure project during Rajapaksa’s rule, post war.

However, pressure from China and the failure of Sirisena and Wickremesinghe to secure significant foreign funding from other countries to kick-start various other development projects led to the lifting of the suspension of the project. It was given the green light mid this year, after several changes were made to the original agreement and the project was rebranded as the ‘Colombo International Financial City’.

Since coming to power, the current government continues to claim that it is saddled with a massive debt left by the Rajapaksa administration. Premier Wickremesinghe told Parliament this year that his government had to pay a debt of almost Rs. 10 trillion (Sri Lankan Rupees) which was left by the Rajapaksa administration, borrowed heavily for various extravagant projects including an unused international airport in ex-President’s hometown, Hambantota.

During a visit to China in April this year, Wickremesinghe has been attempting to renegotiate the terms of an US$8 billion debt Sri Lanka owes China, taken during Rajapaksa’s tenure. “We’ve been talking with some companies and also the government of China about the possibility of some infrastructure projects becoming public-private partnerships, in which, part of the debt will become equity held by the Chinese companies,” he told reports in China during his visit.

By the end of 2015, China has completed infrastructure construction projects worth US$15.5 billion in Sri Lanka, which includes airports, ports, highways and other development projects, majority of which was carried out during Rajapaksa’s administration.

Munza Mushtaq is a senior journalist from Colombo, Sri Lanka. The former News Editor of The Nation and The Sunday Leader, she writes extensively on current affairs, with special focus on politics, human rights, corruption and business matters. She serves as the Assistant Editor - Asia Desk for the International News Services (UK), and contributes to the Nikkei Asian Review and the Colombo Telegraph.
She also functions as a special correspondent for the Los Angeles Times where she reports on significant political developments in Sri Lanka.